BalancerV2 is a decentralized cryptocurrency exchange and an automatic market maker that was launched on the open-source Balancer protocol in 2018. The platform is developed by Balancer Labs and has the form of DAO from the date of governance announcement that took place on the 15th of May, 2020.
The key property of the protocol is a self-balancing weighted portfolio and price sensor. The protocol relies on a concept of a common financial instrument index fund and turns it on its head not paying fees to portfolio managers but collecting fees from traders who rebalance your portfolio by following arbitrage opportunities.
Initially, the founder of the platform tried to find ways to make AMM work as an index fund mechanism or protocol to make it more than an exchange. With the V2 recap, the team continues to make the AMM simpler and more flexible. It also contributes to enhanced security since it guarantees the isolation of internal balancers among pools thanks to the specific vault architecture.
Thanks to Balancer v1, a strong community has been created. The protocol also managed to provide enough liquidity for the project. The Balancer V2 became the upgraded version of the V1 that moved closer to the vision the founders of the platform had concerning the initial source for decentralized liquidity.
The main focus is made on such aspects as flexibility, security, gas, and capital efficiency. To reach the defined goals, the protocol Vault for all Balancer pool assets was employed. The improved version came with enhanced gas efficiency, capital efficiency achieved with the help of Asset Managers, permissionless AMM logic subjected to customization, protocol fees controlled by the community, powerful oracles, and affordable gas.
BalancerDAO promotes the development of the Balancer protocol and ecosystem through the BAL Grant program that was established in August 2021, after community discussion. According to the program, 20,000 BAL, which is worth about a million USD at the time of writing, are allocated as grants. The goal of the program is to help Balancer Protocol to make the leading platform for programmable liquidity. It suits both individuals and groups planning to run a project that builds technology or resources on Balancer Protocol.
Balancer V2 protocol
The main aspect representing a crucial difference between the two versions of the protocol is the transition to one vault that is responsible for holding and managing the assets in all Balancer pools.
Balancer V2 has introduced a new AMM logic that is applied individually to each pool. Technically there is no necessity in using the same logic to the vault as pools’ smart contracts are external. For this reason, it’s possible to customize it depending on the goals. Such tasks as token management and accounting should be subjected to a different logic. This is what Balancer V2 does separating the AMM logic from other tasks.
A new version of the protocol helps to save gas as trading inefficiency was eliminated. Previously, the process of trading from several pools was poorly organized as it was required to send and receive ERC20 from all pools. With the new protocol, the final net amounts are transferred only even when trades are fulfilled in small batches which helps to spend less gas. The process of arbitrage trades was also simplified thanks to this capability.
The possibility of holding internal token balancers has also appeared with Balancer V2 that can considerably alleviate high-frequency trading efficiency. It allows to keep the tokens in the vault without their transition after the trade, in case users plan to trade the assets back several hours later. It removes the necessity to move assets thus avoiding transactions of tokens and saving funds on fees.
Balancer V2 implements different kinds of protocol-level fees controlled by governance. These are trading fees, withdrawal fees, and flash loan fees. All protocol fees are kept in the vault until governance decides how to use them.
The platform has issued the Balancer Protocol Governance Token (BAL) to support decentralized governance and empower the ecosystem. Though V1 was launched without a native token, BAL was released in May 2020, to make the platform’s infrastructure more resilient and competitive on the market.
The holders of BAL vote on new proposals concerning changes to the Balancer community and decide how to use the protocol fees. To vote, the members of the community can either hold BAL on their wallets or hold pool tokens on a wallet for a Balancer Pool with BAL. It’s also possible to vote if the voting power was delegated to a user by another wallet.
The total supply of BAL tokens is 100 million. 25 billion tokens, locked within vesting periods, are allocated to founders, key developers, and advisors. The remaining 75 million tokens are distributed to LPs. With governance approval, these funds can also be allocated to strategic partners in the future to foster the development of the protocol.
The team working over the platform collaborates with the auditing company Trail of Bits throughout the development process. The exchange was also audited by OpenZeppelin in March 2021, and Certora in April 2021.
The protocol includes oracles resistant to sandwich attacks using accumulators. Balancer Labs also runs a Bug bounty program that was updated with the release of the V2 version in April 2021. The company offered the largest bug bounty in history, which is up to 1,000 ETH or more than 3 million USD at the time of writing, for critical bugs allowing attackers to drain the vault of the platform.
Fernando Martinelli is a co-founder and CEO of Balancer Labs. He is a mechatronics engineer with a Master’s degree in Vision Processing in robotics. He also got MBA to try the entrepreneurial route. Having been involved in the crypto industry since 2013, he was very excited about the idea of smart contracts. With time he got acquainted with the members of the MakerDAO team and collaborated with Mike McDonald, who became CTO in BalancerDAO, and Nikolai Mushegian, who became the author of the Balancer protocol whitepaper along with Fernando Martinelli.